What The U.S. Can Learn From Sasol

The company makes liquid fuel from coal, not Mideast oil. And its margins are huge

Some 90 miles southeast of Johannesburg, the cooling towers and pipes of a giant industrial installation sprawl across five square miles. What happens at Secunda, as the place is known, is of great interest these days. At a time of sky-high oil prices, Sasol Ltd. (SSL ), Secunda's owner, churns out 160,000 barrels of gasoline, diesel fuel, and jet fuel a day, enough to cover 28% of South Africa's needs, without using a single drop of crude oil, imported or otherwise.

Sasol is not a household name, but maybe it should be. President George W. Bush wants to curb America's dependence on Middle East oil. Analysts worry about a future gap between supplies and relentless demand. Yet Sasol, with $11.2 billion in revenues, is already enjoying huge commercial success in an arena that has eluded U.S. companies -- making fuel from coal. It is embarking on a program to brew clean-burning diesel from natural gas. It may even link up with coal producers in the U.S. heartland. "What is coming out of the U.S. makes us think there is a real business opportunity for us," says Sasol CEO Pat Davies.

No wonder investors have boosted Sasol's New York Stock Exchange-traded shares by almost 60% in a year, to 34. "You have to tip your hat to them," says Bernard J. Picchi of New York's Foresight Research Solutions LLC. "They've been doing [synfuels] longer than anyone else."

Sasol's technology for making gasoline from coal is named Fischer-Tropsch, after the Germans who developed it in the 1920s. The Third Reich used the process -- which employs heat, pressure, and catalysts to transform carbon monoxide and hydrogen into fuels -- to make diesel during World War II. Similarly, South Africa's apartheid regime employed it to ease the effects of the embargo in the '80s. Sasol has spent decades refining the technology and now has a money-spinner. Assuming oil prices stay in their current range, synfuels alone should earn Sasol $2 billion in operating profits for the year ending June 30, 2006, says Picchi. The fat profits have prompted some South African policymakers to call for a windfall tax on Sasol, a development that recently affected the stock.


Sasol is supplementing its home operations with overseas ventures. The first to come online will be gas-to-liquids gtl) plants in Qatar and Nigeria. GTL plants use a version of the coal-to-liquids technology to make liquid fuels and petrochemicals from natural gas, which Qatar has in abundance. The Qatar plant will eventually produce 34,000 barrels a day of super-clean diesel fuel and other products for Europe. Sasol is also allying its GTL technology with Chevron's (CVX ) exploration and production skills. The two are building a facility at Escravos, Nigeria, and planning another plant in Qatar.

One drawback: cost. Building a GTL plant can cost $40,000 per daily barrel of capacity vs. $15,000 for a conventional oil refinery. But by Sasol figures, the company can still make $30 a barrel if it gets low-cost gas feedstock and crude stays fairly high. Picchi figures Sasol will be getting gas in Qatar and Nigeria at the equivalent of $5 to $10 for a barrel of oil. He sees Sasol earning $350 million per year from those ventures.

Making money out of coal-to-liquids is tougher, since the plants cost more. Nonetheless, coal-rich Pennsylvania has assembled a package of federal and state funding that comes close to the $625 million estimated price tag of a pilot project. The facility, to make diesel from waste coal, would use technology from Royal Dutch Shell (RD ) and Sasol.

Davies thinks such projects could be viable in the U.S. with oil prices at $40 a barrel with "the right incentives." Even so, Sasol would have to overcome concerns about CO2 emissions. Davies figures that by the time Sasol invests in the U.S., its "processes will meet environmental regulations." The hurdles are high. But Sasol has a technology that every energy-hungry country wants to tap.

By Stanley Reed, with Adam Aston in New York

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